How risky are Hong Kong banks' rising financial linkages with Mainland China?

Gross Mainland exposures accounted for 22.1% of system assets.

Hong Kong' economic and financial linkages with China also give rise to potential spillovers from China in case of a rise in financial stress and, ultimately weaker growth, according to Moody's.

"Current growth weakness in Hong Kong echoes a retrenchment in trade and services demands from Mainland China, which have grown in significance in recent years. In 2015, 43.6% of Hong Kong's exports of domestically-produced goods and 53.8% of its re-exports were shipped to China. In addition, 77.3% of tourist arrivals were from China, up from 63% five years ago."

Here's more from Moody's Investors Service:

Hong Kong banks’ balance sheet exposure to the Mainland is high—despite falling in 2015—as seen by the fact that gross Mainland exposures (defined as the sum of non-bank Mainland exposures and claims on Mainland banks) accounted for 22.1% of system assets at end-March 2016. Hong Kong banks' offshore/cross-border exposures include lending to Mainland corporates outside China and Hong Kong entities for use in China.

Hong Kong banks also lend to Mainland borrowers through their local subsidiaries/branches in China (onshore exposures). These exposures are vulnerable to the ongoing economic slowdown in China, as well as the high leverage of Chinese corporates.

There could also be negative spillovers to the monetary markets and stock markets through capital flows. The past year witnessed multiple episodes where disruptions in China’s funds market were echoed by increased volatility in Hong Kong’s money market, with the latest example being the sharp jumps in CNH-HIBOR rates at the start of 2016.

Looking ahead, Hong Kong could be subject to even greater capital flow volatility, with the authorities keen to push for partial capital account liberalization through investment channels such as the Qualified Domestic Institutional Investor scheme and the Stock Connect progammes.